The IASB and the FASB discussed the following topics as they continued their redeliberations on the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED):
- constraining the cumulative amount of revenue recognised;
- collectibility, including accounting for contracts with customers that contain nonrecourse, seller-based financing;
- time-value of money; and
- contract issues—distribution networks.
Constraining the cumulative amount of revenue recognised
The boards tentatively decided that, in keeping with the proposal in the 2011 ED, an entity should evaluate whether to constrain the cumulative amount of revenue recognised if the amount of consideration to which an entity expects to be entitled is variable. Paragraph 53 of the 2011 ED identified examples of variable consideration. The boards tentatively decided to clarify the meaning of ‘variable consideration’ to indicate that the constraint should apply to a fixed price contract in which there is uncertainty about whether the entity would be entitled to that consideration after satisfying the related performance obligation.
This tentative decision was supported by all IASB and FASB members.
In addition, the boards discussed the application of the constraint in the revenue proposals and asked the staff to perform further analysis and bring the topic back to a future meeting.
The boards discussed whether:
- modifying the 2011 ED proposals to require that all impairment losses arising from contracts with customers (regardless of whether the contract has a significant financing component) should be presented adjacent to the revenue line item; or
- introducing a revenue recognition threshold for collectibility.
Following the discussion, the boards requested the staff to further analyse those other approaches for accounting for customer credit risk and to discuss that analysis at a future meeting.
Additionally, the boards tentatively decided:
- to present any impairments recognised in the current period or in a subsequent period in a consistent manner; and
- to provide additional guidance in the Standard about how to determine whether a contract with a customer exists based on the customer’s commitment to perform its obligations under the contract.
All IASB members and FASB members agreed
Time value of money
The boards tentatively decided to approve the proposal in the 2011 ED that an entity should adjust the amount of promised consideration for the effects of the time-value of money if the contract with a customer has a significant financing component.
All members of the IASB and the FASB supported this tentative decision.
The boards also tentatively decided:
- to clarify the application of the indicators in paragraph 59 of the 2011 ED for determining whether a contract has a significant financing component (14 IASB members and 5 FASB members supported this tentative decision);
- to clarify that, if the transfer of goods or services to a customer is at the discretion of the customer, an entity should not adjust advance payments for the effects of the time value of money (all IASB and FASB members supported this tentative decision);
- to retain the proposed practical expedient and clarify that the practical expedient should also apply to contracts with a duration of greater than one year if the period between performance and payment for that performance is one year or less (14 IASB members and 6 FASB members supported this tentative decision); and
- to clarify that the proposed revenue Standard would not preclude an entity from presenting as revenue interest income that is recognised from contracts with a significant financing component (all IASB and FASB members supported this tentative decision).
Contract issues—distribution networks
The boards discussed the application of the proposals in the 2011 ED to arrangements that arise in distribution networks. In those arrangements, an entity (such as a manufacturer) may transfer control of a product to its customer (who may be an intermediary, such as a dealer or retailer). The manufacturer may also promise other goods or services as sales incentives to encourage the sales of those products that have become part of the intermediary’s inventory.
If the promise to transfer those goods or services that are regarded as sales incentives was made in the contract or implied in the circumstances described in paragraph 24 of the 2011 ED, the boards tentatively decided that those promised goods or services should be accounted for as a performance obligation. However, if the promise was made after the transfer of control of the product to the intermediary, the boards tentatively decided that the promise would not be a performance obligation. All IASB members and five FASB members supported these tentative decisions.